Microsoft’s Facebook investment: Smartest deal Ballmer ever made?

It was a modest amount in the scheme of things — a $240 million investment by Microsoft in Facebook in 2007, valuing the social network at $15 billion at the time, and giving the Redmond company a 1.6 percent stake in Facebook.

More than four years later, Microsoft has held on to the investment. And it has already paid off strategically for Microsoft CEO Steve Ballmer by cementing the relationship between the companies.

Joint projects between Microsoft and Facebook have included advertising initiatives and a collaboration between Bing and Facebook to incorporate data from Facebook into search results — a step that Google is now attempting to follow by connecting Google+ to Google search.

Now, with Facebook poised to take its first steps toward an initial public offering, we’ll soon have a clearer sense for the financial value of the investment, as well.

Facebook’s value will ultimately depend on the assessment of the market, but the speculation for its debut generally ranges from $75 billion on the low end to as much as $100 billion.

That would translate into a five- to six-fold increase since 2007, easily boosting the value of Microsoft’s stake to more than $1 billion. Not a bad return, to say the least. (Facebook’s follow-on investment rounds aren’t believed to have significantly affected Microsoft’s percentage stake.)

Of course, the public market would also present Microsoft with a better opportunity to sell those shares. But a complete exit would be a surprise. With more than $51 billion in the bank, Microsoft doesn’t need the money.

And the real value of its relationship with Facebook remains that strategic link.

That’s not an infographic, Chuck. Please copy that into Adobe Illustrator, change the font to 96-point Helvetica Extra Bold with 90% kerning, change the colours to white on black, and paste in silhouettes of Ballmer and Zuck.

Please.

Anonymous

A smart deal, but not (only) because of the cash Microsoft has earned.

This investment came after Microsoft failed to acquire Facebook outright, and it seems likely that the price Microsoft agreed to pay was intended to establish a valuation for Facebook that would make it very hard for Google or another competitor to acquire (in 2007). An eye-opening valuation at the time that could easily have been worthless today (stranger things have happened).

Ray Burt

Get ready! It’s a posting that somehow suggests Ballmer did something good! Predictably, the responses will include lots of Ballmer Bashing — after all, he is the problem, right?

Guest

A lot of men believe they can run Microsoft better than Steve can.

Stories like these why those men are relegated to the comments section of a local tech blog and why Mr. Ballmer is worth $15 billion.

Guest

Yeah, why would anyone second guess the guy who was wrong about the cloud, iPod, iPhone, iPad, thought Vista was great, and believed Google could be caught in search within six months? Or the guy who has outspent Apple and Google combined on R&D every year for a decade and yet now trails both in growth, relevance, and positioning for the future?

Oh, and he used to be worth $30B. Like most shareholders stupid enough to hold MS over the past 13 years, he’s seen their value cut in half. Of course he sold a few billion along the way, so he won’t have to rely on food stamps when MS continues its now 13-year decline.

Guest

You’re down here. Steve is up there.

Your jealousy of Mr. Ballmer’s wealth and influence is consuming you. I recommend a cleanse.

Guest

Maybe that kind of thinking is why he’s consistently so out of touch?

And who is jealous of his wealth? I just think he should be fired based on record. And your inability to debate any of what I said confirms that the evidence in support of that is overwhelmingly on my side.

Some get close, like Steve Jobs did. But this isn’t about being 100% right. It’s about Ballmer being nearly 100% wrong.

What’s wrong with that chart? Where would you like to begin? How about the fact that growth is declining and now less than 5%? Or that MS’s share of overall industry revenue and profits has fallen dramatically over that period while Apple is now larger on revenue and profit and still growing 14 times faster? Maybe you’d like to compare incremental revenue and profit to R&D investment? Oh right, that wouldn’t make MS look very good compared to Apple, Google, Amazon, VMware, or many others. How about we look at the stock chart over the last seven years, or heck even the last 13?

Guest

Well let’s face it, the list of failed Ballmer investments is extensive and frankly unprecedented in the industry. The FB deal is a rare exception that has become financially positive in a relatively short period. Then again it wasn’t done as an investment per se, but rather a search/advertising deal that was structured in an ownership fashion in order to better enable FB to get other interested entities to invest in them at what was then a very high valuation.

Ballmer bashing is well-deserved. Given the dominant position that he started with, it’s embarrassing what’s become of MS relative to competition and the industry overall over the subsequent Ballmer “lost decade”. He’s not the only problem at MS, but clearly nothing will turn around as long as he’s still there, as Steve Jobs so aptly pointed out.

Guest

Facebook is reportedly working on their own phone, which won’t use WP. So not clear how close the relationship really is. This is more a marriage of convenience. The enemy of my enemy is my friend sort of thing.

And while $51 billion is a lot of money in the bank, Apple now has double that. So again not clear that MS doesn’t need all the money it can get. After all, unlike Apple, MS stock has been flat for almost a decade and a half. And acquisitions cost money. So your competitor having twice as much cash as you do, and now generating more of it and at a faster rate, puts MS at a potential competitive disadvantage.

http://jobferral.com Stephen Medawar

They probably should have held onto their stake in Apple as well :) #justsayin

Guest

In hindsight they should have invested all their cash and all their subsequent cash flow into Apple. Because instead of generating a 15X return as that option would have, most of it has been blown on one failed effort after another instead.

Geo Hunt70

Facebook stock was originally valued from Microsoft’s investment in Facebook’s early days.
The catch is that Microsoft also received a promise to spliit Facebook’s ad revenue 50-50. The upshot is that Facebook’s stock valuation as a result of Microsoft’s cash investment ALSO includes this side-deal. Theerfore, Facebook’s stock values are artificially blown up and out of proportion. Buy Facebook fast, hold for a few months and then sell it. GWH